1 Suppose that imports and exports in an industry are $100

million and $200 million, respectively. Will the index of intra-

industry trade for this industry rise, fall, or remain unchanged if
exports fall to $100 million?
rise (Incorrect)
fall (True Answer Correct)
remain unchanged (Incorrect)
There is not enough information to determine how the index will
change. (Incorrect)

2 The ____________ model best explains intra-industry trade.

Ricardian (Incorrect)
Heckscher-Ohlin (Incorrect)
monopolistic competition (True Answer Correct)
specific-factors (Incorrect)

3 To analyze intra-industry trade, we must bring in imperfect

competition, and we change our assumptions about our trade
models to allow:
price-conscious consumers. (Incorrect)
short-run unemployment. (Incorrect)
differentiated products. (True Answer Correct)
perfect competition. (Incorrect)

4 Products traded between two nations that are very similar and
very close substitutes, but that may be of different quality or
prices, are called:
differentiated complements. (Incorrect)
differentiated substitutes. (Incorrect)
differentiated products. (True Answer Correct)
perfect substitute products. (Incorrect)

5 The cross-trade of very similar products exported and imported

by trading partners seems to contradict which model(s)?

Ricardian (Incorrect)
Heckscher-Ohlin (Incorrect)
specific-factors (Incorrect)
All of the answer choices are correct. (True Answer Correct)
6 A differentiated product is one that:

is slightly different from the competitor's product, although it is a

close substitute. (True Answer Correct)
is very different. (Incorrect)
is traded within firms and is not for sale in retail
markets. (Incorrect)
has a shelf life of less than 1 year. (Incorrect)

7 “Differentiated” is another word for:

identical. (Incorrect)
homogeneous. (Incorrect)
heterogeneous. (True Answer Correct)
None of the answer choices are correct. (Incorrect)

8 When a firm raises the price of a differentiated product in an

imperfectly competitive market:

it will see lower sales but will not lose all its sales. (True Answer
Correct)
it will lose all its sales to competitor firms. (Incorrect)
it will actually get new customers from other firms. (Incorrect)
it will see an increase in revenues. (Incorrect)

9 Which of the following features is characteristic of monopolistic

competition?

many large producers (Incorrect)

homogeneous products (Incorrect)
differentiated products (True Answer Correct)
No individual producer has any influence on the market
price. (Incorrect)

10 Which of the following is NOT characteristic of a

monopolistically competitive industry?

monopoly profits (True Answer Correct)

many firms in the industry (Incorrect)
differentiated products (Incorrect)
influence of individual firms on the market price (Incorrect)
11 Increasing returns to scale occurs when a firm's:

average costs of production increase as its output

increases. (Incorrect)
average costs of production decrease as its output increases. (True
Answer Correct)
average fixed costs increase as its output increases. (Incorrect)
marginal costs increase as its output increases. (Incorrect)

12 A feature of imperfect competition is _________, which means

that as the firm expands its production, average costs of
production fall. Therefore, the firm can _______ its costs of
production by selling internationally.
economies of scale; decrease (True Answer Correct)
economies of scale; increase (Incorrect)
increasing returns to scale; decrease (Incorrect)
specialization; increase (Incorrect)

13 The term for very similar products being exported and imported
by trading partners is:

reciprocal trade. (Incorrect)

imperfect competition. (Incorrect)
intra-industry trade. (True Answer Correct)
inter-industry trade. (Incorrect)

14 “Intra-industry trade” refers to:

imports and exports within the same industry. (True Answer

Correct)
imports and exports originating in different industries. (Incorrect)
international trade patterns predicted by the Heckscher-Ohlin
model. (Incorrect)
Ricardian comparative advantage. (Incorrect)

15 When countries specialize in different varieties of the same type

of product and trade them, it is called:

comparative advantage. (Incorrect)

the Heckscher-Ohlin model. (Incorrect)
intra-industry trade. (True Answer Correct)
increasing returns to scale. (Incorrect)
16 The monopoly equilibrium occurs when:

the monopolist has driven out all competitors. (Incorrect)

the monopoly firm has sold the maximum number of
units. (Incorrect)
the monopoly firm produces the quantity that maximizes its
profits (or minimizes loss) where MR = MC. (True Answer Correct)
the monopoly firm has gotten unions to agree to wage
concessions. (Incorrect)

17 For a monopolistic competitor, marginal revenue at its short-

run equilibrium price and quantity equals:

price. (Incorrect)
marginal cost. (True Answer Correct)
average cost. (Incorrect)
average revenue. (Incorrect)

18 A monopolist maximizes its profits by selling up to the point

where:

its price equals its marginal cost. (Incorrect)

its price equals its marginal revenue. (Incorrect)
its marginal revenue equals its marginal costs. (True Answer
Correct)
the difference between its price and average cost is
maximized. (Incorrect)

19 The price charged by a monopoly firm is the market price

(demand curve) at which:

MR = MC, and usually P > MR and P > MC. (True Answer

Correct)
the firm is just breaking even. (Incorrect)
the firm makes a normal profit. (Incorrect)
the firm can export its products. (Incorrect)

20 A monopolistic competitive firm:

will always earn monopoly profits. (Incorrect)

will never earn monopoly profits. (Incorrect)
may earn monopoly profits in the short run. (True Answer
Correct)
 may earn monopoly profits in the long run. (Incorrect)

21 A duopoly is a market structure in which:

two consumers buy the product. (Incorrect)

two firms sell the product. (True Answer Correct)
one firm sells the product and one consumer buys the
product. (Incorrect)
two firms sell the product and two consumers buy the
product. (Incorrect)

22 If there is a duopoly and the products are identical

(homogeneous), the firm selling the product for a lower price
will:
earn less revenue. (Incorrect)
get 100% of the sales. (True Answer Correct)
have a hard time being profitable. (Incorrect)
be perceived to have lower quality products. (Incorrect)

23 In a duopoly where products are differentiated and firms charge

different prices, the demand curves are _______________ than if
the firms sell identical products at the same price.
steeper (Incorrect)
farther to the right (Incorrect)
more elastic (flatter) (True Answer Correct)
less elastic (Incorrect)

24 In a duopoly, each firm faces:

a more elastic demand curve if it raises its price. (Incorrect)

a more elastic demand curve if it lowers its price. (True Answer
Correct)
a perfectly elastic demand curve. (Incorrect)
a perfectly inelastic demand curve. (Incorrect)

25 Which of the following is NOT an assumption of monopolistic

competition?
Each firm's output is slightly different from other firms in the
industry. (Incorrect)
There are many firms in the industry. (Incorrect)
Production occurs with increasing returns to scale
 technology. (Incorrect)
Each firm faces a perfectly elastic demand curve. (True Answer
Correct)

26 The demand curve facing a monopolistic competitor:

is perfectly inelastic. (Incorrect)

is perfectly elastic. (Incorrect)
slopes downward to the right. (True Answer Correct)
has a positive slope. (Incorrect)

27 To analyze monopolistic competition in trade, we make several

assumptions about the market. Which is NOT an assumption of
imperfect competition?
many firms in the industry (Incorrect)
easy entry and exit (Incorrect)
constant long-run average cost (True Answer Correct)
increasing returns to scale, falling long-run average
cost (Incorrect)

28 Which of the following is NOT a characteristic of monopolistic

competition?

Firms have some control over their markets. (Incorrect)

Firms produce an identical product. (True Answer Correct)
Firms retain some ability to control prices. (Incorrect)
The average cost for firms declines as they produce more
output. (Incorrect)

29 Which of the following is NOT an assumption for monopolistic

competition?
Firms produce goods using a technology with increasing returns
to scale. (Incorrect)
There are many firms in the industry. (Incorrect)
Firms have no control over the price of the product. (True Answer
Correct)
Each firm produces a good that is similar to, but differentiated
from, the goods that other firms in the industry produce. (Incorrect)

30 When average costs of production are falling, average cost:

 is higher than marginal cost. (True Answer Correct)
is equal to price. (Incorrect)
is negative. (Incorrect)
is less than marginal cost. (Incorrect)

31 When there are increasing returns to scale, average costs must

be:

falling. (True Answer Correct)

rising. (Incorrect)
constant. (Incorrect)
falling, then rising. (Incorrect)

32 Whenever a firm's marginal costs are less than its average costs,
its average costs must be:

falling. (True Answer Correct)

rising. (Incorrect)
constant. (Incorrect)
falling, then rising. (Incorrect)

33 Increasing returns to scale and declining average costs result

from all of the following except:

focusing on a single product line and specializing. (Incorrect)

exporting goods to other countries. (Incorrect)
selling more in their home market (Incorrect)
hiring more workers at the existing plant. (True Answer Correct)

34 A firm's average costs will be falling whenever its:

marginal costs are positive. (Incorrect)

marginal costs are negative. (Incorrect)
marginal costs are less than average costs. (True Answer Correct)
marginal costs are less than fixed costs. (Incorrect)

35 Firm X's total fixed costs are $1,000. Its total variable costs of
producing 100 units are $2,000, and its total variable costs of
producing 200 units are $4,000. Firm X's average costs
experiences which of the following as it increases output from
100 to 200 units?
Average costs increase. (Incorrect)
Average costs decrease. (True Answer Correct)
 Average costs remain constant. (Incorrect)
Average costs increase slightly. (Incorrect)

36 Consider the following cost information for a monopolist: MR =

$15, MC = $23, and the quantity is 9. Which of the following
statements is correct?
The monopolist should produce and sell 9 units of
output. (Incorrect)
The monopolist should increase production of output. (Incorrect)
We need more information to decide if the firm needs to
produce. (Incorrect)
The monopolist should not produce this output because MR <
MC. (True Answer Correct)

37 At its current production level, a monopolist's marginal revenue

is $20 and its marginal cost is $10. Which of the following
statements is correct?
The monopolist should produce and sell more output. (True
Answer Correct)
The monopolist should produce and sell less output. (Incorrect)
The monopolist is maximizing its profits at its current level of
output. (Incorrect)
More information is required to decide if the firm needs to change
its production. (Incorrect)

38 A monopolistic competitor has fixed costs of $100 and marginal

costs of $10 per unit. What is its average cost of producing 100
units?
$10 (Incorrect)
$11 (True Answer Correct)
$1,100 (Incorrect)
$2,000 (Incorrect)

39 A monopolistic competitor has fixed costs of $100 and marginal

costs of $10 per unit. What is its marginal revenue at its
equilibrium price and quantity?
$10 (True Answer Correct)
$11 (Incorrect)
$1,100 (Incorrect)
$2,000 (Incorrect)
40 If a firm has a total cost of $150 and a variable cost of $100 for
producing 5 units of output, then the fixed cost is:

$35. (Incorrect)
$50. (True Answer Correct)
$250. (Incorrect)
$100. (Incorrect)

41 If a firm has an average total cost of $55 and an average fixed

cost of $10 for producing 5 units of output, then the total
variable cost will be:
$550. (Incorrect)
$525. (Incorrect)
$225. (True Answer Correct)
$65. (Incorrect)

42 If a firm has a total fixed cost of $75 and an average variable

cost of $35 for producing 10 units of output, the average total
cost would be:
$425. (Incorrect)
$42.50. (True Answer Correct)
$110. (Incorrect)
$350. (Incorrect)

43 In the long run, profits in a monopolistic competition market are

zero because:

of government regulations. (Incorrect)

of collusion. (Incorrect)
firms are free to enter and exit the market. (True Answer Correct)
firms produce a differentiated product. (Incorrect)

44 In the short run, in equilibrium, firms that operate in a

monopolistically competitive market have a downsloping
demand curve and will charge a price where _____ and ______ .
quantity produced is maximized; costs are minimized (Incorrect)
sales revenue is maximized; costs are falling (Incorrect)
MR = MC; P > average cost (True Answer Correct)
average costs are rising; sales are rising (Incorrect)

45 Figure: Costs and Demand for a Monopolistic Competitor

 Reference: Ref 6-1

(Figure: Costs and Demand for a Monopolistic Competitor) The

profit-maximizing amount of output produced will be:
42. (Incorrect)
32. (True Answer Correct)
0 (not profitable). (Incorrect)
50. (Incorrect)

46 Figure: Costs and Demand for a Monopolistic Competitor

Reference: Ref 6-1

(Figure: Costs and Demand for a Monopolistic Competitor)

What price will the firm charge?
 $15 (True Answer Correct)
$10 (Incorrect)
The firm cannot be profitable, so the price is zero. (Incorrect)
The firm is a price maker, so it should charge $20. (Incorrect)

47 Figure: Costs and Demand for a Monopolistic Competitor

Reference: Ref 6-1

(Figure: Costs and Demand for a Monopolistic Competitor) The

total cost of producing the profit-maximizing output is:
$320. (True Answer Correct)
$480. (Incorrect)
$420. (Incorrect)
$500. (Incorrect)

48 Figure: Costs and Demand for a Monopolistic Competitor

 Reference: Ref 6-1

(Figure: Costs and Demand for a Monopolistic Competitor) The

profits for the firm are:
$320. (Incorrect)
$480. (Incorrect)
$160. (True Answer Correct)
$420. (Incorrect)

49 SCENARIO: A MONOPOLIST'S MARKET

A monopolistically competitive firm faces demand given by this
equation: P = 50 – Q. It has no fixed costs and its marginal cost is
$20 per unit.
Reference: Ref 6-2

(Scenario: A Monopolist's Market ) What quantity will the firm

produce when it is maximizing its profits?
10 (Incorrect)
15 (True Answer Correct)
20 (Incorrect)
25 (Incorrect)

50 SCENARIO: A MONOPOLIST'S MARKET

A monopolistically competitive firm faces demand given by this
equation: P = 50 – Q. It has no fixed costs and its marginal cost is
$20 per unit.
Reference: Ref 6-2

(Scenario: A Monopolist's Market ) What price will the firm

charge when it is maximizing its profits?
 $20 (Incorrect)
$25 (Incorrect)
$30 (Incorrect)
$35 (True Answer Correct)

51 SCENARIO: A MONOPOLIST'S MARKET

A monopolistically competitive firm faces demand given by this
equation: P = 50 – Q. It has no fixed costs and its marginal cost is
$20 per unit.
Reference: Ref 6-2

(Scenario: A Monopolist's Market ) What is the value of the

firm's monopoly profits when it sets a price that maximizes its
monopoly profits?
$125 (Incorrect)
$300 (Incorrect)
$425 (Incorrect)
$225 (True Answer Correct)

52 Use this demand equation for a good produced by a

monopolistically competitive firm for the following.

Demand Equation: P = 10 – Q
Reference: Ref 6-3

(Demand Equation) At what price is the firm's total revenue

maximized?
$9 (Incorrect)
$7 (Incorrect)
$5 (Incorrect)
$3 (True Answer Correct)

53 Use this demand equation for a good produced by a

monopolistically competitive firm for the following.

Demand Equation: P = 10 – Q
Reference: Ref 6-3

(Demand Equation) If the firm's marginal cost is a constant $2

per unit, what price will it charge and how many units will it
produce if it maximizes its profits?
$8 and 2 units (Incorrect)
$7 and 3 units (Incorrect)
$6 and 4 units (True Answer Correct)
$5 and 5 units (Incorrect)
54 Use this demand equation for a good produced by a
monopolistically competitive firm for the following.

Demand Equation: P = 10 – Q
Reference: Ref 6-3

(Demand Equation) If the firm has no fixed costs and variable

costs of $2 per unit, what is the value of the firm's monopoly
profits when it sets a price that maximizes its monopoly profits?
$7 (Incorrect)
$12 (Incorrect)
$15 (Incorrect)
$16 (True Answer Correct)

55 In the long run, in a monopolistically competitive market, what

will be the situation?
Competition drives out firms until there is only one
left. (Incorrect)
New firms enter the market because of monopoly profits, the
demand curve shifts to the left and becomes flatter, and profits
disappear. (True Answer Correct)
New firms enter the market and eventually there is only one kind
of product, and each firm agrees to share the profits. (Incorrect)
Consumers are left with no choices and no close substitutes, and
firms make higher profits. (Incorrect)

56 When firms charge different prices for differentiated products

in imperfect competition, the firm's demand curve is
___________ than would be the case if firms had identical
products and prices.
flatter (True Answer Correct)
steeper (Incorrect)
farther to the right (Incorrect)
less elastic (Incorrect)

57 In the long run, a monopolistically competitive firm will produce

where:

average cost equals price. (True Answer Correct)

average cost equals marginal revenue. (Incorrect)
marginal revenue equals price. (Incorrect)
marginal cost equals price. (Incorrect)
58 In the long run, a monopolistically competitive firm:

will earn normal profits. (Incorrect)

will earn excess profits. (Incorrect)
will earn no profits. (True Answer Correct)
will produce where marginal cost equals price. (Incorrect)

59 If a firm in monopolistic competition lowers its price, what

would be the case with respect to products sold?
The number of products sold would increase, but actual sales
revenue would fall. (Incorrect)
The number of products sold would decline because this is not
perfect competition. (Incorrect)
The number of products sold would increase slightly—and in
some cases not at all. (Incorrect)
The number of products sold and sales revenues would be higher
as the firm lured customers from its competitors and attracted new
customers. (True Answer Correct)

60 In the short run, international trade allows a monopolistically

competitive firm an opportunity to:

produce more output. (Incorrect)

earn monopoly profits. (Incorrect)
reduce its average costs. (Incorrect)
produce more output, earn monopoly profits, and reduce its
average costs. (True Answer Correct)

61 In monopolistic competition, when trade is opened, if the nations

have similar tastes, technology, products, and costs, the outcome
is that:
no trade is possible. (Incorrect)
consumers are left with no choices. (Incorrect)
each firm has a larger market in which to sell, and consumers
have more choices of sellers and products. (True Answer Correct)
transportation costs become the driving factor. (Incorrect)

62 Suppose that there are 50 monopolistically competitive firms in

country A and 50 firms in the same monopolistically competitive
firms in country B. If country A and country B engage in
international trade, we expect that the total number of firms in
this industry will:
 increase. (Incorrect)
decrease. (True Answer Correct)
remain unchanged. (Incorrect)
first decrease, then increase. (Incorrect)

63 In monopolistic competition, when trade is opened, if the nations

have similar tastes, technology, products, and costs, the firms
will have an incentive to:
lower prices to get new customers and increase market
share. (True Answer Correct)
raise prices to take advantage of a lucrative situation. (Incorrect)
cut corners in manufacturing to boost profits. (Incorrect)
raise quality, so they can charge a higher price than the
competition. (Incorrect)

64 In long-run equilibrium with trade, losses from import

competition will force some firms to ______________ ,
increasing the remaining firms' demand curves, which will
become ______________ , due to the increased variety of
products from _______________.
raise prices; steeper; new firms entering the industry (Incorrect)
leave the industry; flatter; foreign firms (True Answer Correct)
lower prices; more inelastic; new firms entering the
industry (Incorrect)
lay off workers; more elastic; the research and development
departments in firms (Incorrect)

65 In the long run, international trade allows a monopolistically

competitive firm an opportunity to:

produce more output and earn monopoly profits. (Incorrect)

produce less output and earn monopoly profits. (Incorrect)
produce more output and reduce its average costs. (True Answer
Correct)
produce less output and increase its average costs. (Incorrect)

66 In the long run, prices in a monopolistically competitive industry

will be ________ prices without trade.

higher than (Incorrect)

lower than (True Answer Correct)
equal to (Incorrect)
the same as (Incorrect)
67 In the long run, a monopolistically competitive firm that trades
internationally will ____________than it would in autarky.

produce more output (True Answer Correct)

earn more monopoly profits (Incorrect)
have higher average costs (Incorrect)
produce more output and earn more monopoly profits (Incorrect)

68 With increasing returns (falling average costs), as the remaining

firms expand, the demand curves become _______________ due
to foreign competition, and firms must _______________.
steeper; raise prices. (Incorrect)
flatter; lower prices. (True Answer Correct)
flatter; raise prices. (Incorrect)
steeper; lower prices. (Incorrect)

69 Consumers gain from trade within a monopolistically

competitive industry because:

prices fall and product varieties decrease. (Incorrect)

prices rise and product varieties increase. (Incorrect)
prices rise and product varieties decrease. (Incorrect)
prices fall and product varieties increase. (True Answer Correct)

70 Consumers benefit from trade, using monopolistic competition,

because:

the prices are lower than in the no-trade scenario. (Incorrect)

consumer surplus increases as there is more choice of
goods. (Incorrect)
the government provides cash subsidies to consumers. (Incorrect)
the prices are lower than in the no-trade scenario, and consumer
surplus increases as there is more choice of goods. (True Answer
Correct)

71 When firms behave like monopolistic competition, trade benefits

consumers in two ways:

better quality products, increased information (Incorrect)

higher incomes, more dependable products (Incorrect)
lots of bells and whistles, higher wages (Incorrect)
lower prices, more variety (True Answer Correct)
72 Under free trade and monopolistic competition, the following is
likely:
Domestic firms will always be provided cash
subsidies. (Incorrect)
Some domestic firms will shut down. (True Answer Correct)
Consumers will not benefit at all from trade. (Incorrect)
Foreign firms will sell the product at a higher price in the export
market. (Incorrect)

73 The costs identified with opening trade are called:

short-run costs. (Incorrect)

adjustment costs. (True Answer Correct)
variable costs. (Incorrect)
overhead costs. (Incorrect)

74 Adjustment costs include:

dealing with child labor issues. (Incorrect)

human rights. (Incorrect)
getting used to foreign products. (Incorrect)
short-term unemployment. (True Answer Correct)

75 In the long-run monopolistic competition with trade, the

equilibrium number of firms:

lies below that of either country in autarky. (Incorrect)

lies between the number of firms in the two countries in
autarkies. (Incorrect)
lies above the total number of firms worldwide in autarky. (True
Answer Correct)
lies above the number of firms in the two countries in
autarkies. (Incorrect)

76 Which of the following is NOT a reason for Canada to join

NAFTA?
Canada can increase its markets by selling to the United States
and Mexico. (Incorrect)
Canada can enjoy lower average cost by producing
more. (Incorrect)
Canada did not want U.S. products to dominate its domestic
 market. (True Answer Correct)
Canada will see an increase in income and employment by joining
NAFTA. (Incorrect)

77 Using a model of imperfect competition, economist Daniel

Trefler concluded that the North American Free Trade
Agreement:
cost Canada more than 100,000 jobs that were never
replaced. (Incorrect)
presented no real issue about job loss in Canada. (Incorrect)
caused Canada to lose 5% of jobs in manufacturing because
Canadian tariffs had to be cut, but over time the trade agreement
created higher productivity and more jobs to offset losses. (True
Answer Correct)
created new jobs in Canada from day one as firms sold across the
border and undercut U.S. firms. (Incorrect)

78 NAFTA benefited Canadian consumers because of:

higher wages and more travel opportunity. (Incorrect)

lower wages but also lower taxes. (Incorrect)
lower prices but lower quality. (Incorrect)
lower prices and increased variety. (True Answer Correct)

79 Studies have concluded that NAFTA caused ________ in

economic welfare to Canada.

a gain (True Answer Correct)

a loss (Incorrect)
no change (Incorrect)
first a gain, then a loss (Incorrect)

80 Studies of U.S.-Canadian free trade have concluded that free

trade produced what effect on Canadian firms?

increased productivity (True Answer Correct)

decreased productivity (Incorrect)
no change in productivity (Incorrect)
could not be determined (Incorrect)

81 Studies of U.S.-Canadian free trade have concluded that the

number of new jobs created in Canadian manufacturing were
_________ the number of jobs lost elsewhere in Canadian
 manufacturing due to free trade.

less than (Incorrect)

equal to (Incorrect)
greater than (True Answer Correct)
substantially greater than (Incorrect)

82 Since NAFTA was signed, Mexico saw the productivity of its

firms:

decrease in the non-maquiladora plants. (Incorrect)

decrease in the maquiladora plants. (Incorrect)
increase in the maquiladora plants at a faster pace than in the non-
maquiladora plants. (True Answer Correct)
increase in the maquiladora plants at a slower pace than in the
non-maquiladora plants. (Incorrect)

83 Studies of NAFTA have concluded that from 1994 to 2003, free

trade caused ______ increases in the productivity of Mexican
maquiladora firms producing for export than for Mexican firms
mainly producing for the Mexican domestic market.
larger (True Answer Correct)
smaller (Incorrect)
identical (Incorrect)
substantially larger (Incorrect)

84 NAFTA is believed to have __________ manufacturing

productivity, especially in the maquiladora plants.

raised (True Answer Correct)

lowered (Incorrect)
had no effect on (Incorrect)
greatly hindered (Incorrect)

85 NAFTA's effect on Mexican wages of labor was probably slowed

by:
the Mexican peso crisis in which Mexico's currency fell greatly in
value. (True Answer Correct)
the reluctance of the U.S. government to allow guest
workers. (Incorrect)
the Iraq war. (Incorrect)
so much illegal immigration. (Incorrect)
86 Mexico's gains from NAFTA have benefited mostly:

unskilled workers. (Incorrect)

semi-skilled workers. (Incorrect)
higher-income workers. (True Answer Correct)
agricultural workers. (Incorrect)

87 NAFTA probably helped productivity in Mexico's maquiladora

sector, but:

trade with China has taken on more importance. (Incorrect)

world competition and the close relationship with the United
States may have limited its comeback. (True Answer Correct)
both governments have reversed some of the tariff
reductions. (Incorrect)
Mexico has raised taxes on the maquiladoras, and that has caused
international tension. (Incorrect)

88 Studies of NAFTA have concluded that free trade caused ______

in the variety of U.S. imports from Mexico.

decreases (Incorrect)
increases (True Answer Correct)
no change (Incorrect)
slight decreases (Incorrect)

89 Studies of NAFTA have concluded that increases in the variety

of U.S. imports from Mexico are equivalent to about a ________
% per year reduction in Mexican import prices.
100.2 (Incorrect)
10.2 (Incorrect)
1.2 (True Answer Correct)
0.2 (Incorrect)

90 The United States has benefited from NAFTA substantially in

terms of increased ____ , which has lowered prices and given
consumers more choices.
prices (Incorrect)
pariety (True Answer Correct)
manufacturing jobs (Incorrect)
quality (Incorrect)
91 Using data from Trade Adjustment Assistance claims, we can
make an accurate estimate of:
the variety of products U.S. consumers import from
Mexico. (Incorrect)
U.S. exports to Mexico that give Mexican consumers more
product variety. (Incorrect)
the barriers to trade erected by affected firms. (Incorrect)
the unemployment caused by NAFTA. (True Answer Correct)

92 Approximately how many U.S. workers received Trade

Adjustment Assistance from 1994 to 2002 as a result of job
losses due to NAFTA?
525 million (Incorrect)
52.5 million (Incorrect)
5.25 million (Incorrect)
0.525 million (True Answer Correct)

93 U.S. unemployment caused by NAFTA over the years from 1994

to 2002:
totaled 13% of manufacturing job loss in the United States during
that period. (Incorrect)
was not permanent as most workers were re-employed within 3
years. (Incorrect)
was offset completely by increased product variety imports and
lowered prices. (Incorrect)
totaled 13% of manufacturing job loss in the United States during
that period, was not permanent as most workers were re-employed
within 3 years, and was offset completely by increased product
variety imports and lowered prices. (True Answer Correct)

94 U.S. unemployment as a result of free-trade agreements such as

NAFTA:
should be taken much more seriously, and workers should be
offered assistance. (Incorrect)
is a temporary phenomenon to which the economy will adjust
within a few years. (True Answer Correct)
results in a shift into lower productivity jobs such as hamburger
flipping. (Incorrect)
results in a shift into lower productivity jobs such as hamburger
flipping and is a temporary phenomenon to which the economy will
adjust within a few years. (Incorrect)
95 U.S. Trade Adjustment Assistance:

is not available to workers in manufacturing. (Incorrect)

is not available to workers displaced by NAFTA. (Incorrect)
is not available to workers in service industries. (True Answer
Correct)
expired with the advent of the WTO in 1995. (Incorrect)

96 A recap of the effects of NAFTA for its first 9 years reveals some
adjustment costs were offset by:

benefits for U.S. manufacturing productivity. (Incorrect)

benefits for U.S. consumers. (Incorrect)
benefits for higher-wage workers in Mexican maquiladora
industries. (Incorrect)
benefits for U.S. manufacturing productivity, U.S. consumers, and
higher-wage workers in Mexican maquiladora industries. (True
Answer Correct)

97 When imports and exports for the same type of good are nearly
equal:

the laws of comparative advantage break down. (Incorrect)

it is an indication that nearly all the trade is intra-industry. (True
Answer Correct)
exports are probably just ―finished‖ in the nation instead of being
fully sourced there. (Incorrect)
there is a very low level of intra-industry trade. (Incorrect)

98 The calculation that tells us the proportion of trade in each

product involving both imports and exports is:

the index of overlapping production. (Incorrect)

the index of effective trade. (Incorrect)
the index of intra-industry trade. (True Answer Correct)
the index of displacement. (Incorrect)

99 The index of intra-industry trade is calculated as:

the minimum of imports and exports divided by the average of

imports and exports. (True Answer Correct)
the maximum of imports and exports divided by the sum of
imports and exports. (Incorrect)
 imports divided by exports. (Incorrect)
imports plus exports divided by the average of imports and
exports. (Incorrect)

100 Suppose that industry X and industry Y have intra-industry

trade indexes equal to 0.80 and 0.20, respectively. Which
statement below is correct?
There is a greater share of intra-industry trade in industry X than
in industry Y. (True Answer Correct)
There is a greater share of intra-industry trade in industry Y than
in industry X. (Incorrect)
Industry X and industry Y have equal shares of intra-industry
trade. (Incorrect)
There is no intra-industry trade in either industry X or industry
Y. (Incorrect)

101 For which product below would you expect the index of intra-
industry trade to be lowest?

golf clubs (Incorrect)

automobiles (Incorrect)
whiskey (Incorrect)
natural gas (True Answer Correct)

102 If the index of intra-industry trade is high, products are

probably ______ , and costs in both nations are ______ .

identical; different (Incorrect)

differentiated; similar (True Answer Correct)
identical; similar (Incorrect)
differentiated; different (Incorrect)

103 What is the value of the index of intra-industry trade for an

industry in which exports are $100 million and imports are
$200 million?
100/300 = 0.33 (Incorrect)
(100 + 200)/100 = 3.00 (Incorrect)
100/[1/2 × (100 + 200)] = 0.67 (True Answer Correct)
100/200 = 0.50 (Incorrect)

104 If the index of intra-industry trade for an industry is zero, then:

exports and imports in that industry are equal. (Incorrect)

 there are no exports in that industry. (Incorrect)
there are no imports in that industry. (Incorrect)
there is no trade in that industry. (True Answer Correct)

105 If exports of an industry are $100 million and imports are zero,
the value of the index of intra-industry trade is:

0 (True Answer Correct)

1 (Incorrect)
0.5 (Incorrect)
100 million (Incorrect)

106 What is the value of the intra-industry trade index for an

industry in which exports are $100 million and imports are
$100 million?
100/200 = 0.50 (Incorrect)
(100 + 100)/100 = 2.00 (Incorrect)
100/[1/2 × (100 + 100)] = 1.00 (True Answer Correct)
(100 – 100)/100 = 0.00 (Incorrect)

107 What is the value of the intra-industry trade index for an

industry in which exports are $200 million and imports are $20
million?
2.00 (Incorrect)
(200 + 20)/20 = 11.00 (Incorrect)
20/[1/2 × (200 + 20)] = 0.18 (True Answer Correct)
(200 – 20)/200 = 0.90 (Incorrect)

108 Use this table on imports and exports of commodities for the United
States.

Table: Imports and Exports Within Industries

Value of Imports Value of Exports
Product ($million) ($million)
Golf Clubs $305.8 $318.7
Large passenger aircraft 7000 18,821.5
Fax machines 271.8 150.2
Men's shorts 701.3 12.1

Reference: Ref 6-4

(Table: Imports and Exports Within Industries) The intra-industry

trade index for large passenger aircraft is:
 129.10%. (Incorrect)
54%. (True Answer Correct)
2.56%. (Incorrect)
42%. (Incorrect)

109 Use this table on imports and exports of commodities for the United
States.

Table: Imports and Exports Within Industries

Value of Imports Value of Exports
Product ($million) ($million)
Golf Clubs $305.8 $318.7
Large passenger aircraft 7000 18,821.5
Fax machines 271.8 150.2
Men's shorts 701.3 12.1

Reference: Ref 6-4

(Table: Imports and Exports Within Industries) The intra-industry

trade index for fax machines is:
211%. (Incorrect)
90%. (Incorrect)
71%. (True Answer Correct)
98%. (Incorrect)

110 Use this table on imports and exports of commodities for the United
States.

Table: Imports and Exports Within Industries

Value of Imports Value of Exports
Product ($million) ($million)
Golf Clubs $305.8 $318.7
Large passenger aircraft 7000 18,821.5
Fax machines 271.8 150.2
Men's shorts 701.3 12.1

Reference: Ref 6-4

(Table: Imports and Exports Within Industries) In the table, which

industry has the lowest intra-industry trade index?
large passenger aircraft (Incorrect)
fax machines (Incorrect)
 golf clubs (Incorrect)
men's shorts (True Answer Correct)

111 The higher the value for the index of intra-industry trade:

the lower total trade is for other products. (Incorrect)

the greater percentage of trade in that good is intra-
industry. (True Answer Correct)
the more we should be concerned about job loss and
outsourcing. (Incorrect)
the higher the gains from trade. (Incorrect)

112 The gravity equation is used to predict the:

level of bilateral trade. (True Answer Correct)

level of intra-industry trade. (Incorrect)
weight of exports plus imports. (Incorrect)
level of inter-industry trade (Incorrect)

113 Some factors affecting the gravity equation constant are:

tariffs or quotas. (Incorrect)

customs issues and finance and currency issues. (Incorrect)
administrative barriers to trade. (Incorrect)
tariffs or quotas, customs issues and finance and currency issues,
and administrative barriers to trade. (True Answer Correct)

114 Economist Jan Tinbergen developed a formula, called ______ ,

to predict which nations would engage in bilateral trade.

the trade deficit equation. (Incorrect)

the index of equality. (Incorrect)
the Tinbergen ratio. (Incorrect)
the gravity equation of trade. (True Answer Correct)

115 The gravity equation uses a calculation to predict the level of

bilateral trade based directly on ____ and inversely on _____.

wages; technology (Incorrect)

size of GDP; geographic distance between them (True Answer
Correct)
percent of GDP in manufacturing; level of tariffs (Incorrect)
 growth rate of GDP; openness to trade (Incorrect)

116 Other things equal, the gravity equation predicts that the
United States will have more trade with __________ than with
_________ .
Bangladesh; Japan (Incorrect)
Russia; Japan (Incorrect)
Canada; Bangladesh (True Answer Correct)
Russia; Bangladesh (Incorrect)

117 Other things equal, the level of bilateral trade between two
countries will increase as their GDP:

rises. (True Answer Correct)

falls. (Incorrect)
stays the same. (Incorrect)
becomes less equal. (Incorrect)

118 Table: Distances and GDP

Distance from the
Country United States GDP
Germany 4,000 miles $4 trillion
Norway 4,000 miles $0.5 trillion
France 4,000 miles $2 trillion
Sweden 4,000 miles $1 trillion

Reference: Ref 6-5

(Table: Distances and GDP) According to the gravity equation,

which country should be the United States' largest trade
partner?
Germany (True Answer Correct)
Norway (Incorrect)
France (Incorrect)
Sweden (Incorrect)

119 Table: Distances and GDP

Distance from the
Country United States GDP
Germany 4,000 miles $4 trillion
Norway 4,000 miles $0.5 trillion
France 4,000 miles $2 trillion
 Sweden 4,000 miles $1 trillion

Reference: Ref 6-5

(Table: Distances and GDP) According to the gravity equation,

which country should be the United States' smallest trade
partner?
Germany (Incorrect)
Norway (True Answer Correct)
France (Incorrect)
Sweden (Incorrect)

120 The distances from Paris, France to Frankfurt, Germany;

Stockholm, Sweden; and Oslo, Norway are about 400 miles, 450
miles, and 500 miles, respectively. Would you expect more
French trade with Germany, Sweden, or Norway?
Germany (True Answer Correct)
Sweden (Incorrect)
Norway (Incorrect)
Equal amounts of trade would be expected with each
country. (Incorrect)

121 Larger countries will trade more with one another; this is
empirically supported by the:

intra-industry trade. (Incorrect)

increasing returns to scale. (Incorrect)
gravity equation. (True Answer Correct)
comparative advantage. (Incorrect)

122 The gravity equation calculation is:

the inverse of the average GDPs times transportation

costs. (Incorrect)
the sum of GDPs times total exports. (Incorrect)
the product of the GDPs in two nations divided by a measure of
the distance between them times a constant reflecting other factors
affecting trade. (True Answer Correct)
the product of the land mass of the two nations divided by the
average of their GDPs times a constant factor reflecting other
factors affecting trade. (Incorrect)
123 The gravity equation was tested and found to be very accurate
in predicting:

world trade in total. (Incorrect)

trade between various provinces in Canada and American
states. (True Answer Correct)
trade between the United States and Japan. (Incorrect)
trade between nations in the European Union. (Incorrect)

124 To test the gravity equation of trade, a regression model was

calculated for two nations, the United States and Canada,
testing the correlation among:
regional trade, size of GDP, and distance for states and
provinces. (Incorrect)
intra-industry trade, size of GDP, and size of states and
provinces. (Incorrect)
bilateral trade and ratio of GDP for states and
provinces. (Incorrect)
bilateral trade, size of GDP, and distance for states and
provinces. (True Answer Correct)

125 Tests of the gravity equation for trade between Canadian

provinces and American states indicate that:
individual state and individual provincial GDPs are negatively
related to the amount of trade between individual states and
provinces. (Incorrect)
individual state and individual provincial GDPs are positively
related to the amount of trade between individual states and
provinces. (True Answer Correct)
individual state and individual provincial GDPs are not at all
related to the amount of trade between individual states and
provinces. (Incorrect)
the gravity equation does not apply to U.S.-Canadian
trade. (Incorrect)

126 Border effects can result from:

trade. (Incorrect)
tariffs. (True Answer Correct)
monopolistic competition. (Incorrect)
imperfect competition. (Incorrect)
127 What did using the gravity equation to predict trade within the
borders of a nation reveal?
Trade between states or regions within a nation is much more
likely than trade outside the borders. (True Answer Correct)
Trade between states or regions within a nation is much less
likely to occur. (Incorrect)
There was no predictive value for trade within a nation's
borders. (Incorrect)
Trade between states or regions within a nation is more subject to
national law and regulation and therefore not as
predictable. (Incorrect)

128 The Heckscher-Ohlin model can explain simultaneous U.S.

exports of Budweiser beer to Canada and U.S. imports of
Molson's beer from Canada.
True ()
False (True Answer )

129 The Heckscher-Ohlin model is useful to explain why the United

States exports wheat to China and imports shirts from Canada.

True (True Answer )

False ()

130 A country can never import the commodities that it is

exporting.
True ()
False (True Answer )

131 Perfectly competitive firms can influence the price that they
charge.
True ()
False (True Answer )

132 The price set by a profit-maximizing monopolist will exceed its

marginal cost of producing the last unit.

True (True Answer )

False ()

133 Perfectly competitive firms can produce differentiated

products.
True ()
 False (True Answer )

134 The average cost of producing 100 units for a monopolistic

competitor with $100 of fixed costs and a constant marginal
cost of $1 per unit is $2.00.
True (True Answer )
False ()

135 Free entry means that any firm can begin production without
cost.
True ()
False (True Answer )

136 A monopolistic competitor can earn monopoly profits in the

short run.

True (True Answer )

False ()

137 A monopolistic competitor has fixed costs of $100 and a

constant $1 marginal cost of production. This monopolistic
competitor will earn monopoly profits if it produces and sells
300 units at a price of $2.00 each.
True (True Answer )
False ()

138 The demand curve facing a monopolistic competitor will

become more inelastic when it engages in international trade.
True ()
False (True Answer )

139 Compared to a no-trade situation (autarky), a monopolistic

competitor charges a higher price and produces more output
when it engages in international trade.
True ()
False (True Answer )

140 Consumers do not gain from trade in monopolistically

competitive products.
True ()
False (True Answer )
141 In the United States, NAFTA has benefited the economy
because workers gained more than U.S. consumers.
True ()
False (True Answer )

142 The Ricardian model and the Heckscher-Ohlin model show that
countries will export commodities that they also import in
order to maximize gains.
True ()
False (True Answer )

143 Monopolistic competition suggests that under free trade each

country specializes in one product and exchanges it for another
from a foreign country.
True ()
False (True Answer )

144 The index of intra-industry trade increases as the degree of

intra-industry increases.

True (True Answer )

False ()

145 When monopolistic competition exists, a country may both

export and import the same product.

True (True Answer )

False ()

146 Intra-industry trade refers to situations in which a country's

exports and imports are different products.

True (True Answer )

False ()

147 Suppose that imports and exports in an industry are both $100
million. If exports rise to $200 million, the value of the
industry's index of intra-industry trade will fall.
True (True Answer )
False ()

148 Suppose that imports and exports in an industry are $100

million and $200 million, respectively. The index of intra-
industry trade for this industry is ($200)/[1/2($100 + 200)] =
1.50.
 True ()
False (True Answer )

149 Suppose that the index of intra-industry trade for the U.S.
computer industry increases from 0.25 to 0.50. This increase
means that the U.S. computer industry produces more
computers.
True ()
False (True Answer )

150 The index of intra-industry trade can never exceed 1.00.

True (True Answer )

False ()

151 An increase in the index of intra-industry trade implies that

there has been an increase in the country's exports in that
industry.
True ()
False (True Answer )

152 The Heckscher-Ohlin model is a good predictor of trade

patterns for industries with high values of the index of intra-
industry trade.
True ()
False (True Answer )

153 In the Ricardian and the Heckscher-Ohlin models, a country

exports and imports different products.

True (True Answer )

False ()

154 The Heckscher-Ohlin model is a good predictor of intra-

industry trade patterns
True ()
False (True Answer )

155 According to the gravity equation, the larger two countries'

GDPs are, the greater the amount of trade between them.

True (True Answer )

False ()
156 Other things equal, the gravity equation predicts that there
should be more trade between the United States and Canada
than between the United States and Argentina.
True (True Answer )
False ()

157 When research and development costs are spread out over
more consumers, it is an example of what?
()

15 XYZ Corporation is a monopolistic competitor. It has fixed costs of $1,000 per

8 month and a constant marginal cost of $1 per unit of production.
A) Will it earn a monopoly profit if it produces 1,000 units and sells each for $1.50?
B) Suppose the demand curve facing XYZ Corporation shifts to the right so it now can
sell 2,000 units at $1.50 each. Will it now earn a monopoly profit?
C) Why might XYZ's demand curve shift to the right?
D) What must XYZ do in order to find its short-run equilibrium price and quantity?

()

15 ABC Corporation is a monopolistic competitor. It has fixed costs of $5,000 and a

9 constant marginal cost of $500 per unit of production. It faces a demand curve
described by this equation:
P = 1,000 – 10Q.
A) Find ABC's equilibrium price and quantity.
B) Will it earn monopoly profits at this equilibrium?
C) What will happen to ABC's price, quantity, and monopoly profits in the long run?

()

160 Why would you expect firms with high research and
development costs to be more interested in free trade?
()

161 The fall in real wages for the maquiladora workers during the
1990s was likely due to what?
()

162 Would you say that the gains clearly outweigh the costs of
NAFTA for the United States?
()
163 Has the United States gained or lost from NAFTA?

()

164 The table below gives intra-industry trade in three industries.

Which of the three industries has the greatest degree of intra-
industry trade?
A B C
Exports 100 200 300
Imports 200 200 200

()

165 Use this information to answer the following questions: The

GDPs of countries A, B, and C are $1,000, $2,000, and $3,000,
respectively. There are 1,000 miles between country A and
countries B and C. Assume that their markets are
monopolistically competitive. Does the gravity equation predict
that there will be more trade between A and B or between A
and C?
()